IBKR
💰 Interactive Brokers generates revenue through commissions and Net Interest Margin (NIM), the spread earned on client funds.
📉 Falling interest rates are expected to compress the NIM, as the difference between what IBKR earns on client cash and what it pays out narrows, potentially impacting future profitability.
🤔 This potential pressure on a key revenue stream led the speaker to view the stock less favorably when analyzed previously, suggesting caution as interest rates decline.
@bernardodegarcia:
“How is Interactive Brokers with results tomorrow? We’ll talk about Interactive Brokers; it was just one of the companies we analyzed in the group last week, and I didn’t like it much when we analyzed it because it turns out that during these last few years, with the rise in interest rates… let me step aside a bit to explain this problem for a second, okay? It turns out that Interactive Brokers has two ways of making money. It has commissions, obviously, meaning you buy options and they charge you commissions. And then, let’s say, it has the net interest margin, okay? Which is the money it makes with your dollars, investing them in repos short-term, for months, weeks, and so on. And then also, well, this is a number. So, number A minus this is A minus how much money Interactive Brokers is giving you for leaving your money in the Interactive Brokers account. Because we know that Interactive Brokers, until recently, gave you 4%. Well, this changes, okay? So, more or less, this equals like a 1%, imagine, okay? What happens? It’s very simple to get a NIM of 1%, I’m making this up right now, I don’t remember what Interactive Brokers’ NIM is, okay? Net interest margin. Okay? It’s easy to get 1% when rates are at 5%, okay? Because I give you four, but it turns out I can get five, okay? So, there I get this 1%. But when interest rates, okay, when the Fed starts lowering interest rates, which it’s doing and is expected to keep lowering, and puts them at, imagine, 3%, it will be difficult to justify having a 2%, right? So, it’s going to be a bit tighter, right? Maybe it will be 2.5%, okay? So, in the end, this leaves you with 0.5%. What does this mean? Well, the higher the interest rates, the greater the net interest margin will be, so to speak, okay? Greater will be that delta between the amount of money I make with your money and the amount of money I have to give you for leaving your money in my broker, so to speak. And what has happened? Well, since 2020, more or less, as we know, COVID and so on, and inflation, and 2021, that’s when the Fed started raising interest rates, I think from 2022, and that’s when this second way of making money for Interactive Brokers started to take off. If you put on a graph, so to speak, the income generated by Interactive Brokers through commissions and the income generated through NIM, okay? Well, this happens, okay? What happens is that we imagine this is going to stay like this right now, okay? It’s not that it’s going to fall, but it’s not going to follow the super bullish trend it had, right? We imagine it will stay something like this, and this, obviously, well, little by little they will meet. So, well, that’s why not only Interactive Brokers but any company, perhaps also some insurer that doesn’t have a good combined ratio, any company that lived, okay, or whose valuations were practically based on that growth of net interest margin and so on, well, has been somewhat affected. I got quite tangled up, but I think I explained it well, right? Sometimes I get tangled up, but I say, ‘Well said, Bernardo, well said.'”
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